Potential GNP: Its Measurement and Significance

Arthur M. Okun

The Brookings Institution

Washington, D.C.

1962

Introduction

The concept of potential GNP is receiving increasing attention in economic policy

discussions. The interest in potential GNP arises from a number of factors. First,
potential GNP provides a measure of the maximum sustainable output of the economy.
This measure is useful in assessing the capacity of the economy to produce goods and
services. Second, potential GNP provides a benchmark for measuring the actual
performance of the economy. By comparing actual GNP to potential GNP, it is possible
to determine whether the economy is operating at its full capacity. Third, potential GNP
provides a target for economic policy. By aiming to achieve potential GNP, economic
policy can help to maintain high levels of employment and output.

The purpose of this paper is to provide a comprehensive analysis of the concept of

potential GNP. The paper begins by defining potential GNP and discussing its
measurement. The paper then examines the implications of potential GNP for economic
policy.

Definition of Potential GNP

Potential GNP is the maximum sustainable output of the economy. It is the output that
can be produced by the economy at full employment of labor and capital. Potential GNP
is determined by the productive capacity of the economy.

The productive capacity of the economy is determined by a number of factors, including

the quantity and quality of labor, the quantity and quality of capital, and the state of
technology. The quantity and quality of labor are determined by the size and
composition of the labor force. The quantity and quality of capital are determined by the
amount of investment in plant and equipment. The state of technology is determined by
the level of scientific and technological knowledge.

Measurement of Potential GNP

There is no single method for measuring potential GNP. However, there are a number
of approaches that can be used. One approach is to use a production function. A
production function is a mathematical relationship between output and the inputs of
labor and capital. By estimating a production function, it is possible to calculate the
amount of output that can be produced by the economy at full employment.

Another approach to measuring potential GNP is to use a statistical method. This

method involves estimating the relationship between actual GNP and the unemployment
rate. By estimating this relationship, it is possible to calculate the level of output that
corresponds to full employment.

A third approach to measuring potential GNP is to use a consensus approach. This

approach involves obtaining the views of a panel of economists on the appropriate level
of potential GNP.

Implications of Potential GNP for Economic Policy

Potential GNP has a number of implications for economic policy. First, potential GNP
provides a benchmark for measuring the actual performance of the economy. By
comparing actual GNP to potential GNP, it is possible to determine whether the
economy is operating at its full capacity.

Second, potential GNP provides a target for economic policy. By aiming to achieve
potential GNP, economic policy can help to maintain high levels of employment and
output.

Third, potential GNP can be used to assess the impact of economic policy. By
comparing the actual performance of the economy to the expected performance, it is
possible to assess the effectiveness of economic policy.

Conclusion

The concept of potential GNP is a valuable tool for economic policy analysis. By
providing a measure of the maximum sustainable output of the economy, potential GNP
can help to improve the performance of the economy.

The Minimum Wage

The minimum wage is a policy that sets a minimum price for labor. The minimum wage
is typically set by law, and employers are required to pay their workers at least the
minimum wage.

The minimum wage can have a number of effects on the economy. One effect is on the
distribution of income. The minimum wage can help to raise the incomes of low-wage
workers. This can help to reduce poverty and inequality.

Another effect of the minimum wage is on employment. The minimum wage can lead to
a decrease in employment, especially among low-skilled workers. This is because the
minimum wage can make it more expensive for employers to hire workers.

The effects of the minimum wage on employment depend on a number of factors,

including the level of the minimum wage, the state of the economy, and the flexibility
of the labor market.

Arthur Okun's View on the Minimum Wage

Arthur Okun believed that the minimum wage could have both positive and negative
effects on the economy. Okun believed that the minimum wage could have a positive
effect on employment if it raised the average level of wages. This could lead to an
increase in consumption, which could in turn lead to an increase in the demand for
goods and services, which could create new jobs. Okun also believed that the minimum
wage